What is a toxic asset? NPR purchases a toxic asset and wants you to watch it die with them.

Here’s an excellent story below on NPRs Planet Money purchasing a toxic asset that I had to share… Check it out the interactive graph here.

March 12, 2010

Toxic assets — home mortgages packaged into complicated bonds that no one wanted to touch when the housing bubble collapsed — are starting to trade again.

Planet Money wanted to figure out how this chapter of financial history will end.

So we decided to buy a toxic asset of our own.

How We Found Our Toxic Asset

There’s no store where you can buy toxic assets; you have to know a guy. We know Wit Solberg, a former Wall Street trader.

Solberg left Wall Street to set up his own shop, Mission Peak Capital, in Kansas City, Mo. He and a dozen guys sit at desks with their tools: monitors, potato chips, Snapple, chewing tobacco. Pretty much all day long, Solberg looks at those monitors and evaluates toxic assets.

“The big black Angus cow that everybody wants? We’re not buying that cow because it’s too expensive,” he says. “We want the cow that’s got a wounded leg, but she might produce a few more calves for us — and [she's] cheap.”

Tracking Our Toxic Asset

Interactive: Tracking Our Toxic Asset

Solberg starts searching for a bond we might want to buy. And that searching looks a lot like checking your e-mail. Brokers keep sending him announcements about which toxic assets are for sale today. One says: “Cheaper!” Another says: “Super senior steal!”

Around lunchtime, Solberg finds a bond he likes for us. It’s called an Option One Mortgage Loan Trust, or OOMLT (pronounced om-let). Solberg thinks we should offer to buy the bond for “half a cent” on the dollar. That means that, for every $1,000 of the bond’s original value, we’ll offer $5.

But it turns out the guy who’s selling the bond wants 17 or 18 cents on the dollar — more than 30 times what we bid. Solberg says these kind of huge spreads are pretty common in the toxic asset business. People just radically disagree about what things are worth.

Do You Own Part Of Our Toxic Asset?

We’d like to meet some of our partners in the pages of this gigantic financial transaction. If you bought a home in 2005 in Sarasota, Fla., ZIP code 34232, let us know in the comments below or e-mail us. Or if you’ve owned our toxic asset (CUSIP: 41161PUA9), let us know that, too.

We spend two days with Solberg looking for the right toxic asset. One, full of what appear to be California McMansions, seems promising. Solberg prints out a 604-page prospectus that reads like a historical record of the entire financial crisis. It’s all in there — vaporized companies, people struggling to pay their mortgages, and some horribly complicated logic describing which bond holders get paid, in which order, under which conditions. But that bond falls through, too.

Finally, we find a beautiful, totally toxic asset at what Solberg thinks is a good price: $36,000. Back in the bubble, somebody paid $2.7 million for this thing. We buy a piece from Solberg for $1,000. It’s going to be our encyclopedia of the financial crisis.

What Our Toxic Asset Looks Like

Our toxic asset has 2,000 mortgages, many of them in hard-hit states like California, Arizona and Florida. A lot of the people in our bond are really struggling. Almost half are behind on their mortgage payments, and 15 percent of the homes are already in foreclosure.

At some point those homes will be taken over and sold for a loss. Every time that happens, the bond shrinks. Eventually, our part of the bond will disappear entirely.

Until then, we get a little money every month from people paying off their mortgages. We just got a check for $141. If it goes to Thanksgiving, we could double our money.

By the way, we bought the asset with our own money. Any proceeds will go to charity. If we lose money, we take the loss.

The more you make, the more you spend

I’ve got several friends (I was once this person too) who seem to rely on future earnings to bail them out of their current financial situation, and it’s certainly the wrong way to think for various reasons.

I hear this quite often from this type of person - “If I only made more money everything would be alright.” The problem is, this won’t help them get out of the trouble they’ve got themselves into, in fact, it may just make it worse. That’s because, the more they make, the more they spend. Quite often, they’ve spent the money they will make before they’ve even made it. They never develop a true plan for controlling their spending while eliminating their debt and planning for the future.

In the personal finance world, there are typically two kinds of people; Balance Sheet rich or Income Statement Rich. Think of your balance sheet as a snapshot of your net worth, that is everything you own, less what you owe. For example, your home is worth $200,000, but you owe $175,000, if you owned nothing else or owed nothing else, your net worth (or owner’s equity) would be $25,000 ($200,000 – 175,000 =$25,000). Think of your income statement as your revenue less expenses, or your income less your expenses.If you bring in $3,000 per month and you spend $3,000 per month, you’ll have nothing left over at the end of the month, and you’re simply meeting your bills.

Let’s look at two people and discuss who’s balance sheet rich or income statement rich. Fred makes $30,000 per year and owns a home valued at $100,000, but he owes $30,000 on the home still. He also owns his two vehicles free and clear and has no credit card debt. He has also built a retirement nest egg of $250,000. Bill on the other hand makes $150,000 per year, owns a home valued at 1,000,000 – but he owes $950,000 on the home, and has two vehicles he’s making payments on, along with credit card bills, boat payments and much more. At the end of the month, Fred hasn’t a dime to put away for retirement and he finances anything he needs through credit card purchases.

Fred is balance sheet rich, while Bill is income statement rich. Fred will be better off in the long run even though he makes only a 5th of what Bill does. Bill lives modestly and is not burdened by debt and its associated problems. Fred on the other hand, makes good money at his job, but still, at the end of the month, he’s broke and is hardly accumulating any net worth (assets minus liabilities). In fact, he’s just going deeper into debt with no real hope of accumulating any wealth. He’s got all the fancy stuff, but he pushes himself further in debt month after month to maintain his lifestyle. If Fred were to get a big raise or bonus, he would just go out and buy another toy on credit, and never really build any wealth.

See, being income statement rich comes down to having the appearance of being wealthy, when in fact it’s far from the truth. The only person Fred is kidding is himself. He can’t sleep at night nor enjoy anything he has because he worries how he can make his next payment on the extravagant lifestyle he’s grown accustomed to. He’s at risk of defaulting on his loan if he were to lose his job for some reason. He’s got no plan for his future and is living a temporary life of fashion and comfort. Bill on the other hand, could survive without a problem for a year or two if he were to lose his job, because he has accumulated wealth and owns his property. He’s not as dependent on his monthly income to pay his bills as Fred is.

It doesn’t matter how much money Fred will ever make, he will always be broke and never own a thing. It comes down to managing your money properly, not how much money you make. Take the time to create a plan for yourself and build true wealth. Strive to own the things you need to survive, don’t allow those things to own you. It’s time to stop thinking you’ve got to impress anyone, or that more money will solve your problems, you must manage the money you take in properly.

The frugal negotiator can save tons of money (and make much more)

Too many people only think of negotiating for the best price when they’re buying a car, however, there are many other products and services that you pay for that you probably didn’t know you can negotiate the price on. It’s quite ironic how much time “frugal” people are willing to spend in clipping coupons, comparing prices, researching deals, waiting and watching, but they still never truly get the best deal they can – because they don’t ask for it. Many people are just uncomfortable when it comes to negotiating and thus leave significant savings on the table, or give their money away because they fear confrontation.

Most people would be surprised as to how easy it really is to negotiate and how large an impact they could make on their finances by simply asking for a better price. Below, I will list a number of items that you probably didn’t think you could negotiate a better price on, as well as provide you some tips to overcoming your negotiating fears.

Here’s a list of products or services you can potentially save a bunch of money on by simply negotiating:

• College Tuition – Got more than one kid that will attend the same private high school or college? Have a financial hardship? Just ask and see what they can do to lower your cost.
• Clothing – Retailers have significant mark-up in their pricing and managers do have the ability to offer discounts if you ask. Look for flaws in the items being purchased and use those to your advantage in discounting the item you want.
• Mattresses (beds) – Significant markups and dirty sales tactics lead you to believe that there’s little margin for these guys in their pricing. The fact is, if you’re paying more than half of the retail price, you’re probably throwing away money. Check out this guide to buying mattresses to save a bunch of loot!
• Hotels - You can save tons of money by haggling. Check out this site for more info and confessions from a hotel GM.
• Cosmetic Surgery- Negotiate before hand and save money!
  
• Cable - You’ve been loyal and they want to keep you – what are they going to do to keep you? Just ask!
• Groceries – You’re a loyal customer who comes back time and time again, ask and you shall receive.
• Mortgage Rates - Even if you’re upside down with a second mortgage, you can negotiate with your primary lender to drop the rates or you’ll look elsewhere to refinance your first loan. Here’s a great article on doing so.
• Home purchases – In markets like these, you can definitely low ball offers and make out like a bandit. Here’s some info to help you.
• Airline tickets – This Forbes article recommends going through an agent and haggling the lower prices than you can find online, because the agent may have more flexibility.
• Parking tickets and Traffic Tickets – You can negotiate your fines with local municipalities to often surprising results.
• Income Taxes – The IRS would rather have some money than none. Speak to an IRS rep and see what they can do for you, even if it’s simple a lower cost payment plan than racking up debt on credit cards you otherwise wouldn’t have to.
• Medical Bills – There is still flexibility even if your insurance company has already secured a lowered price. Call the doctors medical biller and see what they can do for you.
• Gap Insurance - If you must buy Gap through a dealer, ask for their lowest price. Compare it to the local credit union and ask them to match. If they can’t walk away.
  
• Car Insurance – Talk to your agent and see what discounts you can qualify for. Compare companies and try and combine all insurance policies through one company for significant savings.
• Vacation time – Don’t settle for the standard time offered. Most companies that tell you that they’re not flexible truly are. Sell yourself.
• Salary – It’s important to not focus on salary or vacation until they want you. Employers will do more things for people they want.
• Garage Sales – Everything can be haggled if you’re willing to walk away.
• Craigslist items and services – You should never pay full price for something on Craigslist.
• Haircuts and beauty supplies -  Don’t be afraid to ask for price matching. Stylists rarely care and in fact many like it because it leaves the customer more money to tip them.
• Jewelry - Same ole same ole… here’s a cool guide to help you.
• Cell Phone Plans and cell phones – wait to negotiate until your contract is up for the most bargaining power.
• Professional services like Lawyers, Accountants, Plumbers, Carpenters, etc.. – Negotiate prior to receiving service but keep in mind that if you cut too deep it could affect your service level.

You hate negotiating and or it makes you uncomfortable? Doesn’t it make you more uncomfortable to realize you’re not getting the best deal you can?

When it comes to overcoming your negotiation fears, you must change your buying perspective.

You feel like you’re screwing them over? It truly comes down to your understanding that by your striking a deal, both parties will still come out as winners. If you go and buy something and don’t negotiate, you’re ripping yourself off. If you simply leave them without giving them a chance to lower their price, you’re hurting them. Give them a chance to compete, a sale with low margin is still better than no sale at all.

You spend all that time being a frugal person, yet you don’t take the final steps to realize complete frugality. It doesn’t make sense to spend hours on research and price comparison to save 10% and then leave another 10% or more in potential discounts on the table because you can’t spend another couple of minutes trying to get the best price.

It may take you a few times negotiating before you hone your skills and start to feel comfortable. Here is another resource on different and effective negotiation skills I recommend you read when you get a chance, with an emphasis on the art of persuasion.

Several of the items above were featured on an old article over at Forbes.

Reader Questions: Biweekly mortgage payments and cutting years off of my loan

As my site expands and my readership grows, I will try and answer more specific questions for my readers and create a FAQ section on the site for readers to thumb through if interested. Please, submit your questions to me as well, I will answer them as quick as possible.

Today’s question comes from a friend and a reader Ryan K:

“My mortgage company called me and asked me if I would be interested in signing up for a biweekly mortgage payment plan, they’re telling me I can save thousands in interest and cut years off the life of my loan – what’s the deal, is this something I should look into further?”

First off, Ryan (and my other readers), be wary of any products being “offered” by your mortgage broker that claim to save you thousands of dollars. Quite often, you can accomplish the same thing by simply calling your bank and asking them. In doing this, you can avoid unnecessary fees and other charges that would go right to the mortgage broker for something offered free by your bank. Also, as the old mantra goes “If it sounds too good to be true, it probably is.”

To answer the question though, what they’re telling you with regards to saving money and cutting years off of the life of your loan is quite misleading. They want to make you think that you’re payments will be the same in total and that the frequency of your payments will create savings and lower the life of the loan and associated interest charges. It’s just not true.

Let’s use an example of a mortgage payment of $1000 due every month. If paid as usual, you would pay $12,000 at the end of the year. In going to a bi-weekly payment plan (making a payment every two weeks) rather than making 12 payments per year of $1000, you will be making 26 payments of $500. You will pay off the loan faster because you’re paying more on your loan each year. Instead of having paid $12,000, you will have paid $13,000 at the end of the year.

There’s no question you can save money in the form of interest charges as well as increase your taxable deductions, but you will have to come up with the additional $1,000 per year in mortgage payments to do so.

You can accomplish the same task for free by sending your mortgage payment along with an additional payment to be applied towards principal (make sure your lender allows this, and that you don’t have prepayment penalties).

I caution you to make certain you can make the additional payments if you decide to move to a biweekly payment plan, as you will pay more throughout the year. If you can do it, yes, it’s great. But you’re not saving money by paying more frequently, rather by paying more on the loan period.

What’s your question?

Are you prepared for an earthquake or natural disaster?

Seeing the recent destruction and annihilation in Haiti, Chile, and now Taiwan, it makes sense to review your own disaster preparedness plans. In St. Louis, we’re only 150 or so miles away from a huge fault line ( the New Madrid Fault Line), and honestly, anything could happen at any time. The last time something major happened was about 110 years ago. Before that, about 200 years ago, a major quake on the fault caused the Mississippi to flow backwards, and created Reelfoot lake in TN.

So what can or should we do to ensure we can survive until we can get out of town and or until help arrives? What types of supplies should we have on hand and how can you incorporate this into your everyday living plans so you don’t just do this for a year or two?

• What to do before an earthquake (FEMA)
• What do to during an earthquake (FEMA)
• What to do after an earthquake (FEMA)
• Seven Steps to Earthquake Safety
• Preparedness FAQs

More links to earthquake preparedness information and response agencies